US Fed Announces 50 bps Rate Cut, First Since 2020

US Federal Reserve announced a 50 basis points interest rate cut on Wednesday, marking the first reduction in four years since March 2020. The move marks a major milestone both for the central bank’s long fight with inflation and for Americans struggling with higher cost of living for the past two years.

The Fed announced in a statement that benchmark rate now stands between 4.75 to 5 per cent. The policymakers voted 11 to 1 in favour of the cut which was anticipated by the US markets.

At the end of last year, there were hopes that Fed would start cutting rates early in 2024, easing pressure for consumers as well as for businesses hampered by higher costs.

In recent weeks, Chair Powell indicated that a rate cut is coming this month, as inflation eases toward the bank’s long-term target of 2 per cent, and the labour market continues to cool. The Fed had reduced the interest rates near zero during the Covid-19 pandemic.

The FOMC has been holding its benchmark interest rates in the range between 5.25- 5.5 per cent since it last hiked in July 2023. That’s the highest it’s been in 23 years and has held there despite Fed’s target inflation falling from 3.3 per cent to 2.5 per cent and the unemployment rate rising from 3.5 per cent to 4.2 per cent during that time.

The US markets were mixed on Wednesday morning as investors awaited the Federal Reserve’s latest interest rate decision.

The Dow fell 53 points, or 0.1 per cent. The S&P 500 added 0.02 per cent and the Nasdaq Composite ticked up 0.2 per cent.

However, the Bank of England is likely to hold interest rates steady on Thursday after cutting borrowing costs for the first time since Covid last month. The Bank of Japan will announce its decision on Friday.